What’s Next For This Controversial Accord?

Much of my time over the past week has been devoted to assessing the fallout from a widely expected decision by the White House.

In fact, from what I have been learning, I’ll be spending more time on this developing situation going forward.

Thus far, I have to say that it does not look good.

All signals point toward a U.S. withdrawal from the Iranian nuclear deal – a move by the Trump administration that should occur by Saturday, May 12.

Known as JCPOA (Joint Comprehensive Plan of Action), the accord was agreed to by the five permanent members of the UN Security Council (P5 – the U.S., U.K., Russia, China, and France), Germany, the European Union, and Iran.

After nearly 12 years of off-and-on negotiations, JCPOA was adopted on July 14, 2015, and came into force on October 18, 2015.

Under its provisions, Tehran agreed for 13 years to eliminate its stockpile of medium-enriched uranium, reduce its store of low-enriched uranium by 98%, and decrease the number of gas centrifuges essential for the enrichment process by nearly 67%.

Additionally, for a period of 15 years, JCPOPA provided that Iran would…

Agree to forego the building of any new heavy-water plants (essential to control nuclear reactions) over the same period; And

Limit enrichment to a single location employing first-generation centrifuges for a period of 10 years.

In return, the P5+1+EU agreed to begin phasing out (subject to a staged sequence of verifications) economic and trading sanctions imposed by the UN, the U.S., and the EU.

However, during the 2016 presidential campaign, Trump heavily criticized JCPOA and pledged to scrap the accord.

In his view, matters not part of the agreement, such as Iranian support for global terrorism, continued development of ballistic missile programs, and support for enemies of Israel and Saudi Arabia in the Persian Gulf region, need to be added to the arrangement.

As a result, the White House announced in October of last year that it would not provide the periodic JCPOA certification as required under U.S. law.

Still, the administration did not end the agreement.

Few now expect JCPOA to survive until the end of this month.

Despite clear support from French President Emmanuel Macron, German Chancellor Angela Merkel, and the EU in Brussels to continue JCPOA and offset a Trump veto, the odds are strongly in favor of Trump pulling out by the end of this week.

European positions, on the other hand, are not enough.

A U.S. Defection

The accord as we know it will not survive the defection of the U.S.

The stakes are high.

On May 6, Macron even suggested that the U.S. ending its involvement could precipitate war.

Nonetheless, my contacts in Europe and the Persian Gulf have been active in setting up alternative approaches.

There are two overriding objectives in all of this.

First, European interests are intent on keeping intact business relations forged between them and Teheran after Washington bails.

Much has been accomplished over the past year, including initial steps in major natural gas and liquefied natural gas (LNG) deals.

Anecdotal information has revealed that over €5 billion in European contracts engineered over the last 16 months are now considered vulnerable should JCPOA collapse.

That alone has already resulted in political moves in both Berlin and London to set up hasty countermeasures.

Fact is, there will be European pushback to President Trump and any American flight from the treaty.

However, the terrain is also changing in other ways.

The “Layering” Effect

There is emerging evidence that major Swiss, Dutch, and Singapore-based commodity trading firms (two actively soliciting support from P5 member governments in Moscow and Beijing) are taking positions on futures contracts controlling the disposition of Iranian export crude.

These contracts provide third-party access to global hard currency in anticipation of renewed U.S. banking restrictions.

However, the most intriguing developments have occurred in the rapidly changing private finance sector.

Over the past two years, much of my own time has been spent advising players in this space.

It is not an exaggeration to say that the utilization of private investment has become a very important component in ongoing international energy projects.

But it is the way in which such funding has been structured and applied that has undergone the most significant changes.

The new generation of cross-border investors are no longer interested in simply funding projects or acquiring companies.

In addition, the investments now cut across what used to be quite distinct financing targets.

The simpler model I introduced in 2016 for such an approach looks like this:

PRIVATE INVESTMENT “LAYERING”

The most updated version divides into at least 12 separate categories.

I call it “investment layering,” and it now has at least $145 billion (leveraged at an additional 300% or more) committed.

The approach invests simultaneously in several aspects of the same target, in effect creating an internal hedge.

I can personally attest to this approach figuring in several European-based Iranian initiatives.

Not all of these are in energy, but those in energy are already cutting derivative paper, and setting up future contract clones to cover the sale of production effectively “owned” by Iranian-controlled or partnered entities located in Switzerland and Germany.

Under both the 1979 Iranian Constitution and subsequent legislation, foreigners cannot own any portion of projects, land, or raw materials inside the country.

This has prevented normal joint ventures or partnerships from forming.

However, selling production abroad, thereby also allowing that export stream to serve as collateral for indirect control over home projects and entities (usually creating movement in another of the above categories – debt – to serve as the facilitating instrument), has allowed for the bypassing of the impediment.

Those I advise in this sector will be the first to acknowledge that the pending U.S. move will prompt a pause in such an approach.

Even those in London, Paris, Berlin, Hong Kong, Singapore, and Doha participating in the layering approach may opt to save non-energy Iranian investments first.

But a strategy is also forming to insulate energy investments.

Here’s How It’s Going to Play Out

The most likely outcome from a U.S. pullout is a move to resume American sanctions against those parties involved in the export of Iranian crude oil and natural gas (or LNG), cutting Teheran’s access to hard currency and banking internationally, while renewing pressure on shippers and insurers providing coverage for the trade.

Most of those sanctions are still in place.

JCPOA requires an International Atomic Energy Agency (IAEA) confirmation of Iranian compliance resulting in a sign off by signatories on the other side, and a sequenced relaxing of the sanctions.

Trump has refused to sign off.

On the other hand, the EU, other P5 members, and Germany have attested that Iranian is following JCPOA requirements.

There are three possible scenarios unfolding once Trump makes his decision.

First, JCPOA is ruptured, Iran renews its nuclear program, and the security situation in the Persian Gulf further deteriorates.

Second, Europe proposes an alternative approach that Trump considers, delaying any outcome. In other words, another high stake “kicking the can down the street.”

Third, a Trump decision to end JCPOA is rejected by the other signatories with avenues set up for a continuation of non-U.S. participant projects, and Iranian access to banking.

My sources seem to think the third is going to happen, even if the second is what officially happens.

Most further suggesting that the second it is “acceptable” given the realities in the U.S. approach to diplomacy, and the first is unacceptable.

However, two further regional outliers also come into play.

How will Saudi Arabia and Israel respond?

Riyadh needs as high of a crude oil price as possible to enhance the valuation of the Aramco IPO.

Meanwhile, the recent Israeli presentation arguing that Iran has evaded JCPOA provided no new evidence and nothing post-JCPOA.

That leads at least some in my network to suggest that Prime Minister Benjamin Netanyahu’s (as one put it) “PowerPoint trip” was more for internal and Washington political consumption than anything else.

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